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SMSFs warned on catch with residential property purchases

Clients who plan on undertaking property developments and later buying residential property from these developments through their SMSF, have been warned on a critical trap.

Speaking at the SMSF Summit, Cooper Grace Ward Lawyers partner Scott Hay-Bartlem explained that a superannuation fund can potentially purchase residential property from a property developer if it's trading stock, because residential property held by a property developer as trading stock is business real property.

"So Meriton will have real estate which is business real property, because it's used in their business. So, the fact it's residential, doesn't mean it can never ever be business real property," said Mr Hay-Bartlem.

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Where people establish residential property as trading stock and therefore business real property, however, there is a catch, he warned.

Clients often get unstuck, he said, because they say that they hold the land as trading stock, but don't list it in the financials as trading stock.

"Very few people who say it's trading stock, actually have it in the financials as trading stock, and yet they try and apply a 50 per cent capital gains discount at the end," he said.

"If it's genuinely trading stock and you sell it, your profit will be ordinary income, not capital gain, so be careful with what you say, we've seen the ATO go and ask for bank loan applications."